This is a blog that I started in october 2010, mainly for discussing my ideas on the economy, taxation and politics. Please add comments - I'll do my best to reply. If you are new, I would recommend watching one of my YouTube presentations (in French or English). You can download a fully indexed pdf version (over 800 pages) here.

"Basically, her message was that banks create money “out of thin air” and
lend it to people and governments at interest. If governments borrowed
from their own banks, they could keep the interest and save a lot of
money for the taxpayers.....

But critics said, “Not so fast.” Victoria might be charming, but she was naïve.

One critic was William Watson, writing in the Canadian newspaper The National Post in an article titled “No, Victoria, There Is No Money Monster.”
Interestingly, he did not deny Victoria’s contention that “When you
take out a mortgage, the bank creates the money by clicking on a key and
generating ‘fake money out of thin air.’” Watson acknowledged:

Well, yes, that’s true of any “fractional-reserve” banking
system. Even before they were regulated, even before there was a Bank of
Canada, banks understood they didn’t have to keep reserves equal to the
total amount of money they’d lent out: They could count on most
depositors most of the time not showing up to take out their money all
at once. Which means, as any introduction to monetary economics will
tell you, banks can indeed “create” money.

What he disputed was that the Canadian government’s monster
debt was the result of paying high interest rates to banks. Rather, he
said:

We have a big public debt because, starting in the early
1970s and continuing for three full decades, our governments spent more
on all sorts of things, including interest, than they collected in
taxes. . . . The problem was the idea, still widely popular, from the
Greek parliament to the streets of Montreal, that governments needn’t
pay their bills.

That contention is countered, however, by the Canadian
government’s own Auditor General (the nation's top accountant, who
reviews the government’s books). In 1993, the Auditor General noted in his annual report:

[The] cost of borrowing and its compounding effect have a
significant impact on Canada's annual deficits. From Confederation up to
1991-92, the federal government accumulated a net debt of $423 billion.
Of this, $37 billion represents the accumulated shortfall in meeting
the cost of government programs since Confederation. The remainder,
$386 billion, represents the amount the government has borrowed to
service the debt created by previous annual shortfalls.

In other words, 91% of the debt consists of compounded interest charges.
Subtract those and the government would have a debt of only C$37
billion, very low and sustainable, just as it was before 1974.

Mr. Watson’s final argument was that borrowing from the government’s own bank would be inflationary. He wrote:

Victoria’s solution is that instead of paying market rates
the government should borrow directly from the Bank of Canada and pay
only token rates of interest. Because the government owns the bank, the
tax revenues it raises in order to pay that interest would then somehow
be injected directly back into the economy. In other words, money
literally printed to cover the government’s deficit would be put into
circulation. But how is that not inflationary?

Let’s see. The government can borrow money that ultimately
comes from private banks, which admittedly create it out of thin air,
and soak the taxpayers for a whopping interest bill; or it can borrow
from its own bank, which also creates the money out of thin air, and
avoid the interest.

Even a 12 year old can see how this argument is going to come out."

Point taken. Thanks Ellen.

It's interesting that the early 70s was also the time when the French government unilaterally decided to start borrowing money from commercial banks and running up huge interest charges instead of using the Banque de France to create the same money interest free. According to a number of authors, the change was made with the passing of the 1973 Loi du Finance, signed by the then French Président Georges Pompidou (who had previously worked for the Rothschild bank) and future Président Valérie Giscard D'Estaing. The law effectively made it illegal for the French government to borrow interest free from the Banque de France. You can read about the law here.

Is it just a coincidence that 1973-4 was the time when both the Canadian and French governments decided to start borrowing exclusively from commercial banks rather than using their own public banks to create the money needed by the economy interest free? How many other countries did the same thing?

2 comments:

The Bilderberg Group could well have something to do with this. But whoever was responsible, they certainly slipped it through without anyone noticing. And in 1993 the rules were made really official in Maastrict. No more interest free money from central banks.... we have to borrow everything from the commercial banks who don't even have the money they lend. Brilliant. You've got to hand it to them. And we did - 5.6 trillion euros in EU interest payments since 1995..